Friday, July 3, 2009

I think that Thomas Malthus would have been very much at home in the blogosphere. He weighed in on the issues of the day, bringing careful logical analysis of economic theory to bear on the policy issues that were up for debate. And he was very interested in making the connection between economic principles and real empirical evidence. This is particularly true in his contributions to the debate on the Corn Laws in 1814 and 1815. Malthus authored pamphlets on these issues in 1814 ("Observations on the effects of the corn laws"; link) and 1815 ("Grounds of an opinion on the policy of restricting the importation of foreign corn"; link), and they repay scrutiny today; they are powerful instances of a very smart economist probing the theory and the facts surrounding a complex policy issue. (Here is a nice survey of Malthus's theories; link.)

The Corn Laws might be thought of as a form of "stimulus package" for the British economy in the early nineteenth century. By setting a high tariff on the import of wheat and other grains, Parliament aimed to protect the agricultural sector and to encourage the expansion of grain production to make Britain more independent from external grain providers. One might also compare the debate to the NAFTA debate or to policy deliberations in the 1960s concerning "import substitution" strategies. Opponents argued that removal of the tariffs would bring down the price of grain, a central component of the wage basket; this would help the poor and would also permit a significant reduction of the wage as well. So the issue divides the interests of land owners, industrialists, and the poor.

Malthus's position in the two essays is somewhat different. In the first article he promises to lay out the issue dispassionately, dispelling false opinions about what the effects of the proposed policy might be and diving into the advantages and disadvantages of the policy. He writes that "some important considerations have been neglected on both sides of the question, and the effects of the corn laws, and of a rise or fall in the price of corn, on the agriculture and general wealth of the state, have not yet been fully laid before the public." A bit further on, he writes:

My main object is to assist in affording the materials for a just and enlightened decision; and whatever that decision may be, to prevent disappointment, in the event of the effects of the measure not being such as were previously contemplated. Nothing would tend so powerfully to bring the general principles of political economy into disrepute, and to prevent their spreading, as their being supported upon any occasion by reasoning, which constant and unequivocal experience should afterwards prove to be fallacious.

So--"let's do rigorous and systematic analysis based on the principles of political economy and our best understanding of the facts." Good advice for a policy debate.

Quite a bit of the analysis is devoted to refuting an idea that Malthus attributes to Adam Smith -- that "corn" is a unique commodity because increases and decreases in its price have no effect on agricultural production. The idea seems to be that the price of corn determines the wage and thereby determines all other prices in the economy; a small increase in the price of corn immediately causes an equal increase in the price of labor and all other prices. So corn is a "numéraire" to the whole economy; therefore the economy cannot be influenced by tariffs that alter the money price of corn. This is a notion that Malthus quickly and efficiently dispatches. Referring to the poverty studies of Frederick Morton Eden (1797) (whom Marx also relies on in the Grundrisse), Malthus examines the budget of the laboring poor and finds that only 40% of this budget is directly influenced by the price of grain. So the effect of the price of grain on the wage is only partial. (If we assume that the wage is at equilibrium when it equals the cost of the minimum wage basket, then an increase of 10% in the cost of the bread in the basket (40%) will have only 4% effect on the total cost of the wage basket.) Moreover, he points out that labor markets are different from many other commodity markets in the sense that it is not possible to quickly decrease the supply of labor; so the effect of changes in the price of corn will work only slowly into changes in the price of labor. "It is manifest therefore that the whole of the wages of labour can never rise and fall in proportion to the variations in the price of grain."

Second, on the production side, Malthus goes into quite a bit of detail in the micro-economics of farming: land quality, choice of crops, improvements of land, amount of hired labor and draft animals. And he demonstrates that an increase in the price of the crop will give a clear economic incentive to investors to expand and intensify agricultural production. so quantity responds to rising prices. Higher prices => higher profits => rational incentive to invest more capital in expanded production. In short, the Smithian idea that "corn is unique" is untenable.

The central "general principles" of political economy that Malthus attributes to Smith -- and which he endorses himself -- are essentially these: that the price of a good varies over time according to fluctuations in supply and demand; that the quantity of a good increases when producers have a price-based incentive to invest more capital in its production (and vice versa); and that capital will flow across productive uses in such a way as to bring about an equal rate of profit across sectors and industries. Malthus argues that the idea that corn is a unique commodity directly contradicts these principles. "Corn is subjected to the same laws as other commodities, and the difference between them is by no means so great as stated by Dr Smith."

This conclusion has a direct relevance to the topic of the corn laws. Malthus hereby concludes that a tariff or other restriction on imported grain will in fact have the effect of stimulating additional domestic production. So Britain's grain production would increase under this set of laws. However, here Malthus makes a point about Britain's agricultural potential and the density of its population:

On the whole then considering the present accumulation of manufacturing population in this country, compared with any other in Europe, the expenses attending enclosures, the price of labour and the weight of taxes, few things seem less probable, than that Great Britain should naturally grow an independent supply of corn.

So food self-sufficiency is impossible for Britain (in 1814!). Moreover, there is a Malthusian demographic consequence of free trade in grain that Malthus directly recognizes:

As one of the evils therefore attending the throwing open our ports, it may be stated, that if the stimulus to population, from the cheapness of grain, should in the course of twenty or twenty five years reduce the earnings of the labourer to the same quantity of corn as at present, at the same price as in the rest of Europe, the condition of the lower classes of people in this country would be deteriorated.

Malthus explicitly avoids coming to a conclusion of the overall advisability of the corn laws in this essay; but it is hard not to feel that the balance of arguments here appear to favor "open ports" -- no tariffs or restrictions on the import of grain.

So it is surprising to turn to the second essay, less than a year later ("Grounds of an opinion"), because here he lays out a specific argument in favor of the tariffs. He offers as a central reason for this conclusion the fact that protection will stimulate more agricultural production which will make Britain more nearly grain-sufficient. The argument turns less on economic principles and more on the predicted behavior of grain-producing nations such as France in times of dearth. Recent historical experience demonstrated to Malthus that countries will limit their exports of grain at times when the supply is short and prices are high; but this is precisely when Britain would need to continue to have unfettered access to foreign grain markets. In effect, we might read the first essay as creating the argument in principle for free trade in grain, and the second essay as an argument based on the specific historical facts of international trade that make the free trade policy unwise. Here is how Malthus tries to reconcile theory and empirical experience:

I am very far indeed from meaning to insinuate, that if we cannot have the most perfect freedom of trade, we should have none; or that a great nation must immediately alter its commercial policy, whenever any of the countries with which it deals passes laws inconsistent with the principles of freedom. But I protest most entirely against the doctrine, that we are to pursue our general principles without ever looking to see if they are applicable to the case before us; and that in politics and political economy, we are to go straight forward, as we certainly ought to do in morals, without any reference to the conduct and proceedings of others.

It is interesting to observe that Malthus refers on more than one occasion to the effect that a proposed policy will have on the condition of the poor; he affirms that it would be decisive in favor of free trade in grain if it could be shown that this would improve the standard of living of the poor.

If I were convinced, that to open our ports, would be permanently to improve the conditions of the labouring classes of society, I should consider the question as at once determined in favour of such a measure. But I own it appears to me, after the most deliberate attention to the subject, that it will be attended with effects very different from those of improvement.

However, he believes he can show that this is not the case. (The passage quoted above, for example, follows a line of argument something like this: cheaper food => larger families => more competition for work => lower wages.) Moreover, free trade in grain would have the effect of rapidly reducing British agricultural production, and expelling more thousands of agricultural workers from the farm economy. But industrial labor is unlikely to increase sufficiently to absorb this influx in the medium term:

Our commerce and manufactures, therefore, must increase very considerably before they can restore the demand for labour already lost; for a moderate increase beyond this will scarcely make up the disadvantage of a low money price of wages.

Malthus offers something of a paean to the positive effects of industrialization that is worth quoting from "Observations":

Yet, though the condition of the individual employed in common manufacturing labour is not by any means desirable, most of the effects of manufactures and commerce on the general state of society are in the highest degree beneficial. They infuse fresh life and activity into all classes of the state, afford opportunities for the inferior orders to rise by personal merit and exertion, and stimulate the higher orders to depend for distinction upon other grounds than mere rank and riches. They excite invention, encourage science and the useful arts, spread intelligence and spirit, inspire a taste for conveniences and comforts among the labouring classes; and , above all, give a new and happier structure to society, by increasing the proportion of the middle classes, that body on which the liberty, public spirit, and good government of every country must mainly depend. If we compare such a state of society with a state merely agricultural, the general superiority of the former is incontestable.